Extra Space Storage Q3 2023 Earnings Results & Report

Extra Space Storage EPS Results

• Actual EPS: N/A
• Consensus EPS: $2.03
• Beat/Miss: N/A
• One Year Ago EPS: $2.21
• EPS Beat Rate: 5 of last 8 quarters

Extra Space Storage Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $680.62 million
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Extra Space Storage (NYSE:EXR). is a real estate investment trust that owns, operates, manages and develops self-storage properties in the United States. The company provides storage units for residential, business and vehicle-storage customers, with facilities offering a range of unit sizes and access options.

In addition to operating properties under the Extra Space Storage brand, the company provides third-party property management, acquisition and development services for self-storage owners. Its portfolio expanded through the 2023 acquisition of Life Storage, Inc., bringing Life Storage properties and operations into the Extra Space platform.

Founded in 1977 and headquartered in Salt Lake City, Utah, Extra Space Storage serves customers across multiple U.S. markets. The company is led by Chief Executive Officer Joseph D. Margolis.

Extra Space Storage Q3 2023 Earnings Call Transcript

Key Takeaways

• Merged with Life Storage, adding over 1,200 stores to reach 3,651 total, with integration progressing smoothly to enhance diversification and growth.
• Q3 same‐store revenue rose 1.9% on 94.4% occupancy, driven by strong existing customer retention and rate increases, modestly outpacing expectations.
• Property taxes and insurance costs exceeded forecasts, resulting in a slight same‐store NOI miss, although an G&A beat kept Q3 core FFO at $2.02 per share.
• Realized $23 million in G&A synergies and began property‐level revenue synergies, with full merger synergies expected by Q1 2024.
• Tightened 2023 full‐year guidance, raising the low end of same‐store revenue growth to 2.75%–3.5% and maintaining core FFO at $8.05–$8.20 per share.

Presentation

[Operator]

Good day, and thank you for standing by. Welcome to the Q3 2023 Extra Space Storage Inc. Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jeff Norman. Please go ahead.

[Jeff Norman, VP of Investor Relations & Corporate Communications at Extra Space Storage]

Thank you, Kevin. Welcome to Extra Space Storage's third quarter 2023 earnings call. In addition to our press release, we have furnished unaudited supplemental financial information on our website. Please remember that management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's business. These forward-looking statements are qualified by the cautionary statements contained in the company's latest filings with the SEC, which we encourage our listeners to review. Forward-looking statements represent management's estimates as of today, November 8, 2023. The company assumes no obligation to revise or update any forward-looking statements because of changing market conditions or other circumstances after the date of this conference call.

[Jeff Norman, VP of Investor Relations & Corporate Communications at Extra Space Storage]

I'd now like to turn the call over to Joe Margolis, Chief Executive Officer.

[Joe Margolis, CEO at Extra Space Storage]

Thanks, Jeff, and thank you everyone for joining today's call. We had a busy third quarter. In July, we successfully completed our merger with Life Storage, adding over 1,200 stores to our portfolio and over 2,300 new members to Team Extra Space. The transition is going very smoothly, and I am proud of the teamwork and innovation our employees are demonstrating through the merger. Our combined portfolio of 3,651 stores provides greater diversification, stability, revenue opportunities, and operational efficiencies that I believe will improve our property level and external growth for years to come. From a performance standpoint, the third quarter was generally in line with expectations. Revenue growth moderation for the Extra Space same-store pool flattened meaningfully during the third quarter, and our 1.9% same-store revenue increase was modestly ahead of our expectations.

[Joe Margolis, CEO at Extra Space Storage]

Revenue growth was driven by high average occupancy in the quarter of 94.4%. Existing customer behavior continued to be strong, with solid length of stay, muted vacates, and continued acceptance of rate increases. Rental volume was also steady year-over-year, albeit at lower new customer rates. Expenses came in higher than our estimates, offsetting the revenue outperformance. This was driven by higher-than-expected property tax increases. The higher-than-projected expenses resulted in a modest miss in our same-store NOI, which was offset by a beat in G&A, resulting in core FFO of $2.02. This was in line with our internal forecast. Short-term dilution from the merger with LSI was consistent with our estimates for the third quarter.

[Joe Margolis, CEO at Extra Space Storage]

We have achieved our target G&A synergy run rate of $23 million and will continue to gain additional synergies as we further integrate the team, platform, and portfolio. We have also started to realize property-level revenue synergies as we move existing LSI customers to rates more consistent with the Extra Space portfolio. The incremental FFO contribution from these improvements is partially offset initially by lower occupancy at the LSI properties due to catch-up auctions and lower new customer rates to drive rental demand. However, once we achieve stronger new customer rates and build occupancy, the benefit to FFO will ramp up, and we remain confident we will reach our total expected synergy run rate in the first quarter of 2024.

[Joe Margolis, CEO at Extra Space Storage]

We have slowed our acquisition pace given the LSI merger, but we continue to be very active in third-party management, adding 49 new stores gross in the third quarter, not including the LSI managed stores. Year to date, outside of the LSI merger, we have added 151 stores gross to the managed platform, with only 17 departures. We have also continued to have steady bridge loan volume despite the difficult interest rate environment. In short, property-level performance is in line with expectations. The integration of the Life Storage properties is on track, and we continue to be active in our capital-light external growth channels. As a result, we have tightened our annual core FFO guidance for 2023, maintaining the same midpoint. We will remain focused on maximizing performance at all of our stores and executing our integration plan in the fourth quarter.

[Joe Margolis, CEO at Extra Space Storage]

As we have interacted with our shareholders throughout the quarter, it has been hard to miss the serious concerns people have about wars, the economy, interest rates, consumer health, sector demand, and our stock price.... We absolutely share those concerns. That said, I think it is important to step back and not lose sight of where we stand today. Storage has consistently proven to be a remarkably durable asset class, and Extra Space Storage has the largest and most diverse portfolio in the industry. Occupancy averaged over 94% in the quarter, and it remains very healthy. New customer rates, while not as strong as last year, remain 12% higher than 2019 pre-pandemic levels, and customer health remains strong. New supply continues to moderate, and the headwinds to future new development are substantial and increasing.

[Joe Margolis, CEO at Extra Space Storage]

Our external growth drivers continue to fire on all cylinders, and I am confident in our ability to further scale our platform. And finally, I believe we have the strongest team and operating platform in the industry. It is still a great time to be in storage, and I believe the future of Extra Space remains very bright. I will now turn the time over to Scott.

[P. Scott Stubbs, EVP & CFO at Extra Space Storage]

Thanks, Joe, and hello, everyone. As Joe mentioned, we would characterize the third quarter as in line, meeting our internal FFO projections. The modest miss in property NOI, due to higher non-controllable expenses, was offset by beats in interest income and G&A. Achieved rates to new customers were down an average of 11.8% year-over-year in the third quarter, gapping widest in August and tightening modestly in September and further in October to a negative 10.8%. Given the easier September and October comps, we would have liked to have seen that gap narrow more, but we continue to have a headwind from new customer rates. Fortunately, lower year-over-year vacates and strong existing customer health continues to more than offset the headwind, and revenue performance as a whole continues to hold up.

[P. Scott Stubbs, EVP & CFO at Extra Space Storage]

Weighing these factors, as we forecast revenue for the fourth quarter, new customer rate improvement hasn't been compelling enough for us to raise the high end of our same-store revenue guidance range, but existing customer performance has been steady enough to remove our most cautious scenarios from our full-year revenue guide. As a result, we increased the bottom end of our same-store revenue by 25 basis points to a range of 2.75%-3.5% for the full year. On the expense front, we felt greater than expected pressure from property taxes, primarily in Illinois, Georgia, and Florida. We also had significant increases in property insurance premiums.

[P. Scott Stubbs, EVP & CFO at Extra Space Storage]

We updated our annual same-store expense guidance to recognize actual Q3 expenses, as well as a higher run rate for property taxes, resulting in a revised same-store expense range of 4%-5% for the full year. This results in a tightening of the same-store NOI range of 25 basis points at both the high end and the low end of the range, maintaining a midpoint of 2.75%. Turning to the balance sheet, we drew on our line of credit and an undrawn term loan of $1 billion to pay closing costs and to retire Life Storage's debt that we did not assume. With the merger, we assumed $2.4 billion in Life Storage's publicly traded bonds at the same coupons and maturities.

[P. Scott Stubbs, EVP & CFO at Extra Space Storage]

With the assumption of these bonds, we marked the debt to market, and we have broken out the non-cash interest expense, which has been added back to core FFO. Upon completion of the merger and the assumption of debt, S&P Global upgraded its credit rating on Extra Space to BBB+, which will drive future interest expense savings for the company. Details to our updated debt stack and revised interest rate spreads on our credit facility are included in our supplemental. Last quarter, we provided freestanding guidance for Extra Space Storage, and then provided separate details related to the anticipated dilution associated with the merger. In last night's earnings release, we updated our 2023 FFO guidance ranges for the combined portfolio.

[P. Scott Stubbs, EVP & CFO at Extra Space Storage]

The same-store performance ranges I previously referenced apply to the Extra Space same-store pool, as we have not added the Life Storage stores to the pool. Separate disclosures related to the performance of the Life Storage stores are included in our supplemental financials. Our core FFO range, which includes the short-term dilutive impact of the LSI merger, as well as an add-back for transaction and transition expenses, was tightened to $8.05-$8.20 per share, maintaining the previous midpoint. We have also provided updates to key assumptions for the combined company. As Joe mentioned, our performance was in line with our expectations coming into the quarter, and the integration of Life Storage remains on track.

[P. Scott Stubbs, EVP & CFO at Extra Space Storage]

We continue to believe storage as an asset class is among the most resilient in the REIT space. We believe our operating platform and highly diversified portfolio has become even stronger through the Life Storage merger, and it is positioned for outsized future growth. With that, Kevin, let's open it up for questions.

[Operator]

... Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your telephone. If your question has been answered, or you wish to move yourself from the queue, please press star one one again. We will pause for a moment while we compile our Q&A roster. Our first question comes from Michael Goldsmith with UBS. Your line is open.

[Michael Goldsmith, Analyst, US REITs at UBS]

Good afternoon, thanks a lot for taking my question. Your updated same-store revenue outlook implies positive fourth quarter same-store revenue growth of 0.8% at the midpoint, and you took the low end of the full year guidance range up slightly. So should we interpret the increase in guidance as confidence that you will hit this range? And what have you seen from street rates in October and expect in November and December to meet this range?

[Joe Margolis, CEO at Extra Space Storage]

Yeah, Michael, your assumptions are correct. It does imply at the midpoint that it's positive for the entire quarter. And, you know, we obviously have October largely, you know, we know what October was, and so we're confident that we should hit those numbers.

[Michael Goldsmith, Analyst, US REITs at UBS]

Got it. And my next question is about how the Life Storage portfolio is responding to the Extra Space strategy, right? Part of the revenue synergy from the deal is based on the ability to roll out the Extra Space rental growth algorithm. So can you walk through how the Life Storage customer is responding to lower street rates, and also how the Life Storage customer is responding to the elevated ECRIs? Thanks.

[Joe Margolis, CEO at Extra Space Storage]

Yeah, thank you. Great question. So, the short answer is everything is going as planned. We have begun sending out the ECRI notices to the Life Storage customers, and they are accepting them at the same rate or maybe even slightly better rate than, Extra Space customers. We have headwinds of catch-up auctions and the slightly elevated vacates from the ECRI notices to occupancy on the LSI portfolio. So we have discounted rates on the web, in particular, to protect that occupancy while we do that, and that's been very successful, and we've actually seen a slight uptick in occupancy in the LSI portfolio. So we're really happy with how, the strategy is playing out, and we continue to monitor it and make sure there's no bumps in the road.

[Michael Goldsmith, Analyst, US REITs at UBS]

Thank you very much. I'll see you guys next week.

[Joe Margolis, CEO at Extra Space Storage]

Thank you, Michael.

[Operator]

One moment before our next question. Our next question comes from Jeffrey Spector with Bank of America. Your line is open.

[Jeffrey Spector, Managing Director, Equity Research, Head of US REITs at BofA Securities]

Great, thank you. Joe, you mentioned that as you're integrating and now operating the LSI assets, you're using street rate to build up that occupancy. How should we think about that over the coming months? How long will that take place? And given the existing overlap with the EXR portfolio, is that creating some of the drag, let's say, on street rate in your markets?

[Joe Margolis, CEO at Extra Space Storage]

So I might describe it a little differently. We're, we're using rate, I think, to protect occupancy more. We don't really expect to make significant gains in occupancy until we're done correcting the rates, and getting through the auctions. So, you know, we, we gained, you know, some occupancy, but it's certainly not spiking, and we probably don't expect that until next rental season. You know, with respect to effect on Extra Space stores, that's very market specific and I don't think very significant.

[Jeffrey Spector, Managing Director, Equity Research, Head of US REITs at BofA Securities]

Okay, thank you. And then on the existing customer, you mentioned again the strength there. Can you characterize pricing power today versus, let's say, you know, six months ago? And then can you quantify the length of stay versus the vacates? Thank you.

[Joe Margolis, CEO at Extra Space Storage]

So I don't think pricing power to new customers is significantly different than six months ago. And I guess I'd say the same thing about pricing power to existing customers, which is very strong, is also the same, right? We're not seeing a greater amount of ECRI-induced vacates. And I'm sorry, what was the second part of the question?

[Jeffrey Spector, Managing Director, Equity Research, Head of US REITs at BofA Securities]

If you were able to quantify the vacates versus the length of stay.

[Joe Margolis, CEO at Extra Space Storage]

I'm not sure I understand the question.

[Jeffrey Spector, Managing Director, Equity Research, Head of US REITs at BofA Securities]

Sorry, where is length of stay today? You had mentioned that-

[Joe Margolis, CEO at Extra Space Storage]

Oh, sure.

[Jeffrey Spector, Managing Director, Equity Research, Head of US REITs at BofA Securities]

The length of stay remains strong and vacancies are down.

[Joe Margolis, CEO at Extra Space Storage]

Sure.

[Jeffrey Spector, Managing Director, Equity Research, Head of US REITs at BofA Securities]

Sorry.

[Joe Margolis, CEO at Extra Space Storage]

Yeah. So no, I should have understood what you were saying. So lots of different ways to measure length of stay. You know, our average in-place customer is about 34.4 months, which is up 1 month year-over-year. Our existing customers who have been in the store for 12 months is 61%. That's down a little bit as we continue to normalize from those COVID highs at that metric. We've also lost a little bit of our 24-month customers. That's about 45% now, but still higher than pre-COVID. Is that helpful?

[Jeffrey Spector, Managing Director, Equity Research, Head of US REITs at BofA Securities]

Yes. Thank you.

[Joe Margolis, CEO at Extra Space Storage]

Sure.

[Operator]

One moment before our next question. Our next question comes from Cassandra Cassandra Izzi with Truist Securities. Your line is open.

[Cassandra Furber, Analyst at Truist Securities]

Hi, thanks for taking my question. So, in the quarter, you showed an improved pace of same-store revenue and same-store NOI deceleration. Is that because of easier comps, or do you think rates have somewhat stabilized at current levels? I'm just trying to better understand if this improved deceleration is sustainable or if we should expect a steeper deceleration in 2024.

[P. Scott Stubbs, EVP & CFO at Extra Space Storage]

Yeah, so comps throughout this year have gotten easier as we've moved through. In terms of how it came out versus what we were expecting, it was pretty similar to what we were expecting. As we mentioned earlier, we don't expect things to go negative in the fourth quarter, and that sets us up for what we hope to be a good 2024. You know, I think our occupancy is holding up well and, you know, not going negative, I think, is a positive thing.

[Cassandra Furber, Analyst at Truist Securities]

Okay, got it. And then shifting gears a little bit, can you talk about, your... or can you give us your thoughts around your balance sheet and your, variable rate debt? Right now, approximately 30% of your debt is variable. Do you have any plans to decrease your exposure there, or are you planning on keeping the portion of your variable debt where it is?

[P. Scott Stubbs, EVP & CFO at Extra Space Storage]

Yeah. So our variable rate debt actually ticked up slightly in the quarter as we completed the merger. With the merger, we had to pay off some fixed rate debt. You had private placement bonds on Life Storage that weren't allowed to be prepaid. To do that, we've used a bridge loan, a billion-dollar bridge. That's a 2-year loan, and we will be terming that out over the next 1-2 years. So we will be bringing that down. If you look at our variable rate debt net of the variable rate borrowings, it's about 75%, but, you know, again, we'll be bringing those down.

[P. Scott Stubbs, EVP & CFO at Extra Space Storage]

Variable receivables.

[P. Scott Stubbs, EVP & CFO at Extra Space Storage]

Variable receivables, sorry.

[Cassandra Furber, Analyst at Truist Securities]

Okay, got it. Sorry. That's helpful. Thank you.

[P. Scott Stubbs, EVP & CFO at Extra Space Storage]

Thank you.

[Operator]

One moment for our next question. Our next question comes from Todd Thomas with KeyBanc Capital Markets. Your line is open.

[Austin Peak, Equity Research Analyst at KeyBanc Capital Markets]

Hi, this is AJ on for Todd. I appreciate you taking my question. Real quick, could you just provide an occupancy update for October and what that looks like year-over-year?

[P. Scott Stubbs, EVP & CFO at Extra Space Storage]

Yeah. For the two portfolios, Extra Space, the same-store portfolio ended October at 93.9. It's a 1% gap from where we were last year. The Life Storage occupancy is 90.8 compared to last year, and that has actually narrowed the gap slightly. Our occupancy calculation is slightly different than the way Life Storage calculated. We're going with our occupancy calculation going forward as they excluded or made adjustments that we don't make on an ongoing basis.

[Austin Peak, Equity Research Analyst at KeyBanc Capital Markets]

And what is that year-over-year on your calculation?

[P. Scott Stubbs, EVP & CFO at Extra Space Storage]

It's narrowing, and I actually don't have last year's in front of me right now.

[Joe Margolis, CEO at Extra Space Storage]

We haven't adjusted last year's Life Storage occupancy to reflect our methodology.

[P. Scott Stubbs, EVP & CFO at Extra Space Storage]

Correct.

[Austin Peak, Equity Research Analyst at KeyBanc Capital Markets]

Okay, good to know. And then, my second question. So you provided a little color around the $100 million of synergies. You noted that you have met the $23 million in G&A synergies. We see some gains in tenant insurance. How should we think about the opportunity to meet or exceed the $100 million guidance over the next several months?

[Joe Margolis, CEO at Extra Space Storage]

So, I think we have a significant opportunity to exceed the G&A synergy of $23 million. Our original guidance for that was $140 million. Our original Extra Space guidance at the beginning of the year before this merger was contemplated. Our current midpoint guidance for G&A is $150 million. So it's not quite, you know, $10 million every six months of additional G&A because we closed the merger on July twentieth. G&A is not smooth. You know, G&A is higher in the first quarter. It's not perfectly spread out through the four quarters, and we still have some hiring to do to fill in some spots. But clearly, we're gonna be ahead of our $23 million run rate.

[Austin Peak, Equity Research Analyst at KeyBanc Capital Markets]

Okay. And then on the tenant insurance synergies, how much more upside do you see there, and can you comment as you continue to transition the LSI customer to EXR's policy and pricing?

[Joe Margolis, CEO at Extra Space Storage]

Sure. Thank you. So we've achieved very little of that synergy because the only Extra Space tenant insurance policies we're selling now are to new customers. Existing customers will not convert from the Life Storage insurance policy to the Extra Space insurance policy until starting January 1, 2024, and that was for both regulatory and contractual reasons. But that will be somewhat of a light switch, right? We'll send out the notice, people will get them, and they'll be on the Extra Space policy, which, you know, is both more robust in terms of coverage, but also has a higher premium.

[Austin Peak, Equity Research Analyst at KeyBanc Capital Markets]

Okay, perfect. Thank you.

[Operator]

One moment before our next question. Our next question comes from Juan Sanabria with BMO Capital Markets. Your line is open.

[Juan Sanabria, Managing Director, Senior U.S. Real Estate Analyst at BMO Capital Markets]

Hi, good morning. Just wanted to kind of piggyback on a couple questions that have already been asked. I guess on the sequential deceleration that it moderated in the third quarter, and it's expected to moderate even further. Should we think that that continues into 2024 as you stand here today based on what you know? And I'm not asking you to give 2024 guidance, but I guess what the market is really wondering is, have we passed the worst, particularly given where comps are as we look into 2024? Just curious on your thoughts and what you could share there.

[P. Scott Stubbs, EVP & CFO at Extra Space Storage]

If you look at our deceleration through the year, I mean, we've clearly moderated that deceleration. Our fourth quarter guidance implies that it continues fairly flat from where we are today. 2024, you know, we'll be ready, obviously, to give the full year guidance in February, but, you know, I think we're set up to be. We're in a good spot. You know, we'd like to see new customer rates get stronger, but existing customers are holding up very well. You know, 2024 also has easier comps compared to what we had this year.

[Juan Sanabria, Managing Director, Senior U.S. Real Estate Analyst at BMO Capital Markets]

And then, can I just ask on the LSI occupancy front, is part of the synergies that you guys are assuming that you're able to make up the difference in occupancy between the EXR and LSI portfolio? And how... I guess, what, if so, what does that entail doing to close that gap, or are you happy keeping the portfolios running at different occupancy levels? Just curious on how that should evolve.

[Joe Margolis, CEO at Extra Space Storage]

So I, I'll tell you how we underwrote the transaction to get to underwritten synergies and really how we get there, mix of occupancy and revenue, we don't really care as much as long as we get the dollars. So you know, we, at underwriting, we observed on average a 2% gap in occupancy and about a 15% gap in rate. And to get to our $65 million of property synergies, we underwrote zero improvement in occupancy and about a 7% improvement in rate. So our, our opportunity to do better is to, you know, achieve better than those assumptions. Sorry for stating the obvious.

[Juan Sanabria, Managing Director, Senior U.S. Real Estate Analyst at BMO Capital Markets]

Well, so would you want to discount further at LSI to close that gap, or, or are you happy kind of running two different occupancies across the different portfolios?

[Operator]

Hello, Jeff, are you still there? Hello, Jeff? Ladies and gentlemen, please stand by. Juan, are you still there?

[Jeffrey Spector, Managing Director, Equity Research, Head of US REITs at BofA Securities]

Yes, I'm still here.

[Operator]

Okay, looks like we may had an issue on their end, so should be back on momentarily. Ladies and gentlemen, please stand by. Again, ladies and gentlemen, please stand by. Your call will resume momentarily. Again, ladies and gentlemen, please stand by.

[Operator]

... Hello, Jeff, are you back online?

[Jeffrey Spector, Managing Director, Equity Research, Head of US REITs at BofA Securities]

We're back.

[Operator]

Okay. So I guess-

[Jeffrey Spector, Managing Director, Equity Research, Head of US REITs at BofA Securities]

Kevin, if you'll just give us one second, I'm gonna join also, so we can see the login here.

[Operator]

Okay, sure thing. Then, after that, I'll let Juan continue with his questions because he's still in the queue.

[Jeffrey Spector, Managing Director, Equity Research, Head of US REITs at BofA Securities]

I'll mute my microphone as soon as it lets me in.

[Operator]

Okay, sure thing.

[Jeffrey Spector, Managing Director, Equity Research, Head of US REITs at BofA Securities]

Just one second.

[Joe Margolis, CEO at Extra Space Storage]

Jeff, just as a heads up, you're live.

[Jeffrey Spector, Managing Director, Equity Research, Head of US REITs at BofA Securities]

Perfect. All right. Thank you everybody for your patience. Juan, I'm not sure where you lost us in the middle of Joe's response. Could you give us a re-prompt, and we'll reanswer the question?

[Juan Sanabria, Managing Director, Senior U.S. Real Estate Analyst at BMO Capital Markets]

Sure. My addendum is the goal or to close eventually that occupancy gap, or are you happy, I guess, running different levels of occupancy across the two portfolios?

[Joe Margolis, CEO at Extra Space Storage]

So, you know, the portfolios will be run on the same platform, right? Despite the two brands, it's gonna be the same customer acquisition systems, the same pricing algorithms, the same sales process. So eventually, the two portfolios should run very similarly. We don't have a strategy of running a higher occupancy Extra Space store and a lower occupancy Life Storage store. Everything's gonna be run on one platform to maximize revenue.

[Juan Sanabria, Managing Director, Senior U.S. Real Estate Analyst at BMO Capital Markets]

Understood. Thank you.

[Joe Margolis, CEO at Extra Space Storage]

Sure.

[Operator]

One moment before our next question. Our next question comes from Spenser Allaway with Green Street. Your line is open.

[Spenser Allaway, Senior Analyst, Self-Storage at Green Street]

Thank you. I know you commented in your, your opening remarks, that you're focused on your asset-light initiatives right now, but can you just walk through where you're seeing specifically the best returns in terms of, your use of capital right now?

[Joe Margolis, CEO at Extra Space Storage]

Sure. So the best returns on capital continues to be a redevelopment of existing stores. You know, those returns are high single, low double-digit returns. You know, you can add units where you already own the land, you already have the office, you already have entitlements, and you know, we are very excited to now have 1,200 more stores to look at and try to find additional opportunities to put storage in parking lots or make single-story storage, multi-story storage. The challenge with those are they're relatively small in terms of dollar investment, so you have to do a lot of them. But we have a team and a process and a program, and we expect to do a lot more of those in the future. Another, you know, our bridge loan program also provides very high return on capital.

[Joe Margolis, CEO at Extra Space Storage]

The whole note rate is 10% now, averages 10% now, and when we sell the A note, the rate on the B notes is into the teens, and that does not include the economic benefit of managing the property which we lend on. So that also is a very good use of capital, particularly because we can control the capital by selling or not selling the A note.

[Spenser Allaway, Senior Analyst, Self-Storage at Green Street]

Okay, thank you. And then, do you have a sense for EXR assets that are now in a competing radius of newly acquired LSI assets? Do you have a sense of what the average delta would be for the in-place rents for the EXR versus the legacy LSI assets?

[Joe Margolis, CEO at Extra Space Storage]

So I think our best sense is, one of the ways we underwrote this transaction is we identified 106 or 109 LSI stores that had one or more Extra Space store that was in a very tight geographical radius, was a similar type store in terms of single-story drive-up or multi-story, and, you know, we felt was a truly competitive store. And at the time of underwriting, the delta in rate was about 15% for those stores.

[Spenser Allaway, Senior Analyst, Self-Storage at Green Street]

Great. Thank you so much.

[Joe Margolis, CEO at Extra Space Storage]

Sure. Thanks, Spencer.

[Operator]

One moment for our next question. Our next question comes from Smedes Rose with Citi. Your line is open.

[Smedes Rose, Analyst at Citi]

Hi, thanks. I just wanted to ask you on the LSI portfolio, you mentioned a number of catch-up auctions, and I'm just a little, I guess, a little less familiar with that. I'm just wondering, is that a significant part of the portfolio? Will it make a significant difference, I guess, as those customers are, I guess, cleared out, who are non-paying and putting in new customers?

[Joe Margolis, CEO at Extra Space Storage]

I mean, it's a standard practice when we buy a store not to rely on the prior owner's auction process, because we don't want to get caught up in a non-compliant auction. So we start the auction process over again, and that leads to a several-month lag. So we have, you know, several months of units, non-paying units, we have to auction out, recover those units, and relet them. It, it, it's temporary and in the overall scheme of things, I think, not significant, although it does provide some occupancy pressure in the short run. Yes, it's more a function of taking over.

[P. Scott Stubbs, EVP & CFO at Extra Space Storage]

Yeah.

[Joe Margolis, CEO at Extra Space Storage]

Sorry. Yeah, go ahead. Yeah.

[P. Scott Stubbs, EVP & CFO at Extra Space Storage]

I was gonna say, Smedes, it doesn't really impact your bad debt either, because you've already accrued the bad debt reserve, so there's no impact there, but it does impact occupancy.

[Joe Margolis, CEO at Extra Space Storage]

Okay. And then I just, you know, you mentioned higher property taxes in the quarter, and it just as you—for your larger expense lines, just looking into next year, is there sort of a broad sense of how we might be thinking about, you know, wages and benefits, the pace of growth slowing at all? Is it, you know, maybe what are you thinking about for kind of the pace of tax, property tax increases? Any sort of thoughts there you could share?

[P. Scott Stubbs, EVP & CFO at Extra Space Storage]

Yeah, so we actually thought it had decreased some, you know, in the six-month numbers. Think we were looking pretty good. We'd won some appeals. We were a little bit surprised on how our actuals came in for Florida and Georgia and Illinois versus the estimates we'd made using property tax consultants. You know, we hope that the worst of the property tax reassessments are behind us, but, you know, every year is a new year with the local municipalities.

[Joe Margolis, CEO at Extra Space Storage]

Okay. On wages and benefits, how is that pacing?

[P. Scott Stubbs, EVP & CFO at Extra Space Storage]

Wages and benefits, we've actually had it slow some. We don't see the wage pressure that we saw the last couple of years. Our, you know, we saw it higher slightly earlier in the year as we had more hours compared to prior years when it was difficult to hire. Today, it's much easier to hire. Our applicant flow is significantly better, and we're not seeing the wage pressure we've seen over the last couple of years.

[Smedes Rose, Analyst at Citi]

Okay, thank you.

[Operator]

Thanks, Smeeds. One moment for our next question. Our next question comes from Ronald Kamdem with Morgan Stanley. Your line is open.

[Ronald Kamdem, Equity Research Analyst, REITs at Morgan Stanley]

Hey, just two quick ones from me. Just going back to the same-store revenue number of close to 1% in 4Q. Is the messaging, and I think this got asked earlier, but is the messaging that essentially, unless you sort of see things take a turn to the downside, wouldn't expect, you know, that number to get sort of worse going into next year? Or is it sort of still wait and see? I'm just trying to figure out if 4Q is sort of a good run rate looking forward from here, without asking for guidance.

[P. Scott Stubbs, EVP & CFO at Extra Space Storage]

Yeah. So we think it's a good run rate, the estimate we've given for the quarter. Obviously, October's done. It's too early to tell for next year.

[Ronald Kamdem, Equity Research Analyst, REITs at Morgan Stanley]

Great. And then, doubling back on the sort of the expense line items, you know, obviously you took the same store up for EXR. I see sort of LSI at 4.5 as well. Maybe can you talk about, you know, just doubling down on, whether it's marketing expenses or insurance, is there anything, either one-time in nature this year that we should be mindful of, or are these sort of, decent run rates? Thanks.

[P. Scott Stubbs, EVP & CFO at Extra Space Storage]

Yeah. So Life Storage, the big increase year-over-year, came from more personnel and the payroll line item. Our managers, on average, make more, and we have more hours allocated to our stores, and, you know, that's how we get the premium rates that we get. So we are operating them more like we operate our stores. The other thing that's different from their historical, same-store numbers is, we have allocated call center and a technology charge to the stores that they historically had in their G&A. So we went back to their historical numbers and added those in, too.

[Ronald Kamdem, Equity Research Analyst, REITs at Morgan Stanley]

Great. That's it for me. Thanks so much.

[P. Scott Stubbs, EVP & CFO at Extra Space Storage]

Thanks, Ronald.

[Operator]

One moment for our next question. Our next question comes from Caitlin Reynolds with Goldman Sachs. Your line is open.

[Caitlin Burrows, VP, Equity Research Analyst, REITs at Goldman Sachs]

Hi, everyone. I was wondering, maybe I don't think anybody's asked about supply yet. So we've seen it fall off in other sectors, new starts. I was wondering if you could comment on what you're seeing now. Have you noticed any projects, either getting or taking longer, getting pushed out, or any new ones getting started? Just kind of what you're seeing on the new supply side.

[Joe Margolis, CEO at Extra Space Storage]

Sure, great question. So we continue to see moderation in new supply. You know, the peak was maybe 2018, and every year since then, it's moderated. We expect deliveries in 2023 to be kind of similar to 2022, but after that, likely to be, you know, more moderation. The headwinds to new supply in terms of interest rates and debt capital, equity capital availability, construction costs, entitlement period, you know, underwriting forward revenue growth, are pretty significant. And the dropout rates for projects that you can see on Yardi and all those other reports are really high. And a lot of projects we see in these reports end up not getting built.

[Caitlin Burrows, VP, Equity Research Analyst, REITs at Goldman Sachs]

Just to that last point, would you say that that dropout rate is more significant today than it has been in, like, the past because of maybe those factors you mentioned?

[Joe Margolis, CEO at Extra Space Storage]

Many of us were at a conference in New York the other couple weeks ago, where, you know, one of the leading brokers in the industry said he thinks the dropout rate is 70%-90%. I don't have the statistics for that, but that's an observation from someone who's, you know, very, very close to the industry.

[Caitlin Burrows, VP, Equity Research Analyst, REITs at Goldman Sachs]

Got it. And then maybe just a quick one on the transaction side. You mentioned that, EXR has pulled out recently, especially to focus on the LSI merger, which makes sense. I guess, could you comment more broadly on the transaction market? Kind of, are properties trading? Have cap rates stabilized? Has the bid-ask spread closed, or is it still pretty quiet, in storage also? Thanks.

[Joe Margolis, CEO at Extra Space Storage]

... Yeah, I would characterize it as quiet. There are very few transactions that we see end up making. Many transactions, people bring out portfolios, and they don't end up transacting. That's an indication of a bid-ask spread. And the transactions we do see that happen, there's, there seems to be some story, either on the buyer side, why, why it was a, a special buy for them, or on the seller side. But I, I don't think there's enough of a market where I could tell you what market cap rates are. It's just very quiet and very circumstantial.

[Michael Mueller, Senior Equity Research Analyst, REITs at JPMorgan]

Makes sense. Thanks.

[Operator]

One moment before our next question. Our next question comes from Samir Khanal with Evercore. Your line is open.

[Samir Khanal, Equity Research Analyst at Evercore ISI]

Hi, Joe. When I look at some of your top markets, you know, the Texas markets, Florida, they're holding up quite well this year and, and from a revenue growth perspective. And, and I guess, how are you thinking about those Sun Belt markets into next year? You know, the markets which got a boost in the last few years, I mean, do they give back in 2024? How are you thinking about that?

[Joe Margolis, CEO at Extra Space Storage]

So, you know, there's, there's two things I think to think about. One is... Maybe three things. One is job growth. Job growth is, you know, maybe the number one indicator of storage performance, and those Sun Belt markets still, still have job growth, and, that's an important factor. On the flip side, you know, when a market has a couple of years of 20%, 30%+ revenue growth, it's really difficult to keep up. So it may look like it's giving back because it's not growing as fast, but it's still a healthy market, and it's just coming up against a tough comp. And then lastly, you know, which is a little bit of the wild card, is the housing market. You know, I firmly believe the housing market will come back. It's got to. People can't stay in their houses forever. Life events happen.

[Joe Margolis, CEO at Extra Space Storage]

Just when and how quickly is gonna be a factor that will inform our performance next year.

[Samir Khanal, Equity Research Analyst at Evercore ISI]

Got it. And then just as a follow-up from prior questions, you mentioned the 15% gap, I think, between rents for the LSI and EXR portfolio on underwriting. And just I want to clarify, did you say the gap is about 7% today?

[Joe Margolis, CEO at Extra Space Storage]

No, I said we underwrote 7% to achieve our underwritten synergies. So we underwrote not closing the occupancy gap at all and only closing about half of the rate gap, and that if we can do those two things, that will give us our $65 million synergies from the properties.

[Samir Khanal, Equity Research Analyst at Evercore ISI]

Okay, got it. Thank you for that. And then finally, on just maybe ECRIs, I mean, how much has that pace of, I guess, increases moderated at this point? I mean, I'm just trying to think, if you have macro conditions that sort of stay similar as it is, I mean, do you think that moderates further in 2024? How are you thinking about that?

[Joe Margolis, CEO at Extra Space Storage]

Well, maybe not as much as might be, you know, we might assume, because one of the big drivers of ECRI is the gap between the discounted web rate the customer comes in and the actual market rate for that unit. So while we're in a period of time now where we're offering significant discounts for customers to come in through the web, that gives us the opportunity to catch them up through ECRI and get them to what the true market rate is.

[Samir Khanal, Equity Research Analyst at Evercore ISI]

Okay, thank you.

[Operator]

One moment for our next question. Our next question comes from Michael Mueller with JP Morgan. Your line is open.

[Michael Mueller, Senior Equity Research Analyst, REITs at JPMorgan]

Yeah, hi. I'm curious, what are the early observations on operating two brands versus one brand so far?

[Joe Margolis, CEO at Extra Space Storage]

So it's very early. We don't have any firm conclusions. I think the most important thing that we see is, you know, we have increased our digital footprint. So when you're in one of those saturated markets where we're operating two brands and you, you know, search for storage near me or whatever generic storage search you use, you will find both Extra Space and Life Storage branded stores come up on the search, sometimes also a Storage Express store. So we are getting more digital real estate. That's kind of the main assumption to the success of the program, but it's very early, and we have, we have, you know, quite a ways to go before we can draw definitive conclusions.

[Michael Mueller, Senior Equity Research Analyst, REITs at JPMorgan]

Got it. Okay. And then maybe one other quick expense question. And I know this isn't a huge line item in the grand scheme of things, but the growth in insurance expenses, how should we think about that over the next few years in terms of, you know, how outsized it could be or relative to the overall expense pool?

[P. Scott Stubbs, EVP & CFO at Extra Space Storage]

I think it'll bend a little bit on claims. You know, you had a really rough year in Florida this past year. Overall, if you had wind, you know, anything wind-related in Florida, saw a 100+% increase, you know, in, in lots of areas. So I think it'll depend some on events that happen, but you've also seen a rise in interest rate cause those pools not to be as deep as they've found other sources to put-- other places to put that money. So, making sure that we have competitive bids, you know, adding the Life Storage properties will help us because we have a new group of, insurers that we haven't used in the past, and so hopefully we should be able to bring that down and not see the kind of increases we've seen this year.

[Operator]

... Got it. Okay, thank you.

[Joe Margolis, CEO at Extra Space Storage]

Thanks, Mike.

[Operator]

One moment for our next question. Our next question comes from Keegan Carl with Wolfe Research. Your line is open.

[Keegan Carl, VP, Equity Research - REITs at Wolfe Research]

Yeah, thanks for the time, guys. I guess maybe first on occupancy, where do you expect your year-over-year occupancy delta versus last year to trend for the balance of the year?

[Joe Margolis, CEO at Extra Space Storage]

We're assuming about a 100 basis point gap through this year, and then obviously moving into 2024, I think that gap, you know, gets easier.

[Keegan Carl, VP, Equity Research - REITs at Wolfe Research]

Got it. And then shifting gears here, I feel like these two platforms have kind of gotten lost in the shuffle, just given the Life Storage deal. I'm just curious if you can provide any update on the Bargold and Storage Express platforms. Because what are you guys seeing as far as internal and external growth opportunities?

[Joe Margolis, CEO at Extra Space Storage]

Sure. So, Bargold, you know, I would say, is glass is half full and half empty. The half full is, we've done a really, really good job of institutionalizing and integrating the operations there, and we're significantly outperforming budget on the expense side. Where I think we have more wood to chop is the growth side of that. We are growing Bargold at historical rates, at the rates that Bargold grew before we bought it, and we really want to turn some attention to that and try to grow it at a faster rate. Some of that, I think, is just us, getting to know the business, getting to know the people and understanding it, and some of it is frankly, attention on, you know, Storage Express and then Life Storage.

[Joe Margolis, CEO at Extra Space Storage]

Storage Express is, I think we made a lot of progress. It was actually in some ways harder to integrate Storage Express because it was a different platform, a different way of doing business. I mean, we got all of the 1,200 Life stores on our operating platform, Breeze, in 19 days. It took us 6 months with this 107 Storage Express stores because it's a different way of operating. There's just different software systems, procedures. So we're doing very well on the integration front. We have bought several, small, you know, remotely managed stores in our traditional markets, not in the more rural markets they operate in. They trade at 7% yield, so, we, we feel they're good purchases, and we're learning a lot.

[Joe Margolis, CEO at Extra Space Storage]

We're learning about, you know, exactly what should be a remote store, partially manned, what are the various attributes, distance from an Extra Space store, population, rent per square foot, saturation, that makes it work and makes it doesn't work. We have opened up our third-party management platform. We just signed up a 16-property portfolio to be run remotely. We have a large, large pipeline of remotely managed stores for our ManagementPlus platform. So I think similar to Bargold, the growth of that platform was slowed by our attention to the Life Storage deal. We used that time to learn things, which I think is good, and, you know, as we move forward, I expect that growth to accelerate.

[Keegan Carl, VP, Equity Research - REITs at Wolfe Research]

Great. Thanks for the time, guys.

[Joe Margolis, CEO at Extra Space Storage]

Sure.

[Operator]

I'm not showing any further questions at this time. I'd like to turn the call back over to Joe Margolis for any closing remarks.

[Joe Margolis, CEO at Extra Space Storage]

Great. Thank you everyone for your time today. I hope the message was clear that things are going as expected. Our integration and realization of synergies are proceeding very well, and we look forward to seeing many, many of you in Los Angeles next week. Thank you very much.

[Operator]

Well, ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.

Participants

Executives

• Jeff Norman, VP of Investor Relations & Corporate Communications
• Joe Margolis, CEO
• P. Scott Stubbs, EVP & CFO

Analysts

• Michael Goldsmith, Analyst, US REITs at UBS
• Jeffrey Spector, Managing Director, Equity Research, Head of US REITs at BofA Securities
• Cassandra Furber, Analyst at Truist Securities
• Austin Peak, Equity Research Analyst at KeyBanc Capital Markets
• Juan Sanabria, Managing Director, Senior U.S. Real Estate Analyst at BMO Capital Markets
• Spenser Allaway, Senior Analyst, Self-Storage at Green Street
• Smedes Rose, Analyst at Citi
• Ronald Kamdem, Equity Research Analyst, REITs at Morgan Stanley
• Caitlin Burrows, VP, Equity Research Analyst, REITs at Goldman Sachs
• Michael Mueller, Senior Equity Research Analyst, REITs at JPMorgan
• Samir Khanal, Equity Research Analyst at Evercore ISI
• Keegan Carl, VP, Equity Research - REITs at Wolfe Research